Plunge in Capital Spending Could Slow Hiring & Economic Recovery

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Although initial claims for jobless benefits fell more than expected last week, a slowdown in U.S. business investment indicates hiring will continue to stall.

Applications for unemployment benefits dropped by 31,000 last week to 473,000, the Labor Department said yesterday (Thursday), providing some relief that the job market isn't deteriorating rapidly as the economy slows. Economists surveyed by Dow Jones Newswires had predicted filings would decline by 10,000.

But claims still remain elevated and aren't likely to boost confidence in the economic recovery. The four-week moving average, which smoothes volatility in the data, rose by 3,250 to 486,750, the highest level since Nov. 28, 2009. And new claims for the previous week were revised upward to 504,000 from 500,000.

While claims remain well below their high of 651,000 in March 2009, they still reflect a job market that is far from healthy. After claims posted steady declines earlier in the year, they have started to creep upward again. For the week ended Aug. 14 claims stood at their highest level in nine months.

What's more is that capital spending – one of the few bright spots in the economy – declined in July, according to the Commerce Department. And the government's report on durable goods orders showed demand for non-defense capital goods, excluding aircraft, dropped 8% after climbing 3.6% in June.

Analysts see non-defense durable goods as a proxy for future business investment. Orders climbed at a 20% annual rate over the past three months. That's down from a 31% gain in the three months to June, which suggests companies may rein in investment and hiring.

Durable goods shipments, which are used in calculating gross domestic product (GDP), decreased 1.5% percent in July after rising 1%. And a Commerce Department report scheduled for release today (Friday) is likely to show the economy expanded at about a 1.4% rate in the second quarter, down from the 2.4% pace previously estimated, according to Bloomberg.

Analysts said the latest numbers, combined with reports showing sales of new and existing homes, unexpectedly dropped to record lows last month, indicating businesses may soon scale back plans for hiring even further.

Although the numbers tend to fall early in a quarter, "the capital spending implications still look atrocious," Feroli said. "The downshift in the pace of capital spending is particularly worrying as this was the strongest, most reliable sector of the economy over the past year."

The grim nature of the latest reports is likely to put pressure on the U.S. Federal Reserve to consider additional measures to sustain the recovery from the worst downturn since the Great Depression. The Fed, led by Chairman Ben S. Bernanke, on Aug. 10 decided to repurchase treasury notes to keep interest rates at record low levels and prevent money from being drained from the financial system.

Economists at Goldman Sachs Group Inc. (NYSE: GS) said in a note to clients that further action from the Fed "will be forthcoming later this year or early next year, as slow growth and rising unemployment raise concerns about a potential double dip."

Employers will remain reluctant to take on more workers until they see more evidence of sustained economic growth, leaving unemployment hovering near 10%, and curtailing consumer spending which makes up 70% of the economy.

A Labor Department report next week may show that private payrolls in August failed to grow for the first time in eight months, said Feroli.

Feroli believes the odds of a double-dip have increased to about one-in-three in the past two weeks and said a decline in private payrolls "would raise some concern about whether the recovery is proceeding or not."

"If you see a couple of months of decline you'd be more confident that we actually were in a recession," he said.

Both Dow in addition to Nasdaq tend to be dealing under milestones struck previously this kind of weeks time. The Dow closed over tough luck, 000 with Wednesday to get before seeing that May perhaps '08.

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